Acceptable Risk vs. Acceptance of Risk


I was listening in on a webinar called “The Future of DeFi” put on by one of the leading VC firms in crypto, Pantera.

Their guests were the CEOs of Risk Harbor, a provider of crypto insurance, and Notional Finance, a provider of fixed yield products.

I’m personally much more bullish on Nexus Mutual (where I serve as the marketing advisor) than Risk Harbor for a variety of reasons, it was interesting to hear the CEO’s perspective.

Now, if you read Pantera’s blog post from June 2021, Investing in Risk Harbor, introducing their commitment, it says:

In the past year, over $400 million worth of crypto assets has been stolen in DeFi-related hacks and attacks. According to CipherTrace, DeFi hacks were responsible for the theft of $156M between January and April of 2021. Yearn.Finance, for instance, was exploited in February, resulting in the loss of $11 million of crypto assets. In early March, DODO lost $3.8 million in a similar attack, followed by Roll being exploited for $5.7M just days later. In the last month alone, we’ve seen Rari Capital ($10M), EasyFi ($80M), and FinNexus ($7.6M) also get hit with devastating, costly attacks.

The good news is DeFi projects are experiencing explosive growth, and that growth shows no signs of slowing down.

Bad news?

This rise in hacks is likely to accelerate as DeFi continues to grow, further exposing liquidity providers and stakers to acute risks of loss.” (note: bold mine)

It’s that last line that gets me and that same perspective permeated the call.

“Hacks are here to stay” and “smart contracts are going to get exploited.”

In investing, there’s “acceptable risk” and then there’s “acceptance of risk.”

The call felt like the three speakers had just thrown up their hands and said “oh well, hacks are going to happen, may as well insure them.”

But I don’t think that’s going to cut it to help catalyze the adoption of DeFi by the so-called “masses.”

The attitude of the Risk Harbor CEO was like someone who is used to living in the Wild West, “yeah, there are occasional bandits that come through town, but that’s just life on the frontier.”

For people who have been in crypto for a while, life on the frontier is what we willingly chose and accept, but not everyone wants to be on the frontier.

Some want law and order and civilization before they bring their assets there.

While it may not remove risk entirely, the Radix Engine, the world’s first DeFi engine, is going to lower the amount of risk in DeFi to much more acceptable levels, making DeFi far more welcoming for more people.

Many of today’s “DeFi Degens” have reached an admirable point of Buddha-like acceptance of the risk of smart contract hacks and other hazards of Web3. That’s great and they are being handsomely rewarded for taking on that risk.

But, acceptance and acceptable are two different things.

For DeFi to get to the $400 trillion mark (where it will inevitably end up), the base level of acceptable risk must be lower.

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